Five Recommended Steps for Getting Mortgage Ready
1. Educate yourself – Take Home Buyer Education Classes
When it comes to purchasing a home, there is no such thing as having too much education.
While there is a convenience to taking classes online, having a Financial Coach or HUD-Certified Housing Counselor guide you through the process is invaluable. Housing Counselors can also inform you about down-payment/closing cost assistance programs that are available from various sources.
A HUD-Certified Housing Counselor is the only member of your Home Buying Team that does not profit when you purchase a home. They are an unbiased resource for you.
If you go straight to a lender, that lender will only offer programs that they themselves have.
It is best to shop at least 2-3 lenders before committing to one.
Some lenders may not offer you any home buyer assistance at all – for various reasons.
If you are informed that you do not qualify, ask the lender why. Various reasons could be income ( your income is too high per program guidelines, or too low in relationship to debt a.k.a. debt-to-income ratio); credit score is too low or the property is not located in a LMI area – as examples.
2. Determine what an Affordable Housing Payment is to you.
Lenders will pre-approve you based on your Gross income (income before taxes and deductions). They also look at your monthly debt payments that are on your credit report and other monthly obligations such as IRS payments and child support.
Lenders will calculate your Debt-To-Income ratio that incorporates your new housing payment (PITIA), your existing debt obligations and compares it to your gross monthly income. If that number is too high, based on the lender’s underwriting guidelines, your application may be denied.
A HUD-Approved Housing Counselor/Financial Coach will assist with calculating your debt-to-income ratio and with creating a post (after)-purchase spending plan based on your NET (after-tax) income, your living expenses that don’tappear on your credit report , and your monthly debt payments.
It is VERY important that you know what youcan afford. Don’t base your purchase price solely on what a lender says you can afford. Again, they don’t know review your living expenses and again, they don’t consider the income that you actually bring home – your NET income.
3. Build up your Savings
Even if you are fortunate enough to receive enough assistance that will cover all of your closing costs at closing – you still need money to get to closing.
There will be upfront costs, such as Earnest Money when you make an offer on a home. The cost of a Property Inspection will also be an upfront expense. You may have to pay for the property Appraisal and some Real Estate Attorneys may ask for some of their fees upfront as well.
Lenders will also see that you have some reserves – 2 to 4 mortgage payments set aside. Life happens. You always want to have a savings reserve to help pay for repairs and maintenance. Remember, you no longer have a Landlord to call.
4. Know your “middle” FICO CreditScore
Lenders will look at the scores on each of your 3 credit reports by pulling a “Tri-Merge” credit report (a report that shows credit scores and detailed credit history from the 3 major Credit Bureaus; Experian, TransUnion and Equifax).
Lenders will disregard your highest and lowest scores and use the score that falls in the middle – NOT and Average score. For instance, if your scores are:
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Experian 636
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TransUnion 682
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Equifax 642,
lenders will use the 642 score from Equifax as the score to qualify you for your mortgage.
If you are purchasing with another person (partner, spouse, etc.) lenders will use the Middle Credit Score of the person/applicant with the LOWEST scores.
We have found that the FICO Mortgage score is the closet to the scoring models lenders use. Your FICO scores can be found at www.myfico.com. NOTE: There is a charge to find out your scores.
“Free” websites such as Credit Karma will provide you with a score which uses a Vantage scoring model. While the information on Credit Karma is the same, the score can widely vary.
What is a good “enough” score?
Some lenders will approve a mortgage with a FICO score as low as 580. Some lenders will approve with a 620. However, some home buyer assistance programs may require a higher middle credit score. A credit score above 680 should qualify you for most down payment assistance programs.
In addition, a good to excellent score may qualify you for better interest rates.
5. Get your paperwork in order
Lenders will request several documents from you to get started with approving/underwriting your loan:
Proof of Income;
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W-2’s and/or Federal Tax Returns (1040’s) from the last 2 years
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Pay Stubs – most recent 30-60 days
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Award Letters from Social Security, if applicable
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Pension Statements
Proof of Savings Reserves:
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Savings Account Statement(s)
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Checking Account Statement(s)
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Retirement Accounts Statements (IRA’s, 401K, Pensions)
Again it is highly recommended that you seek the guidance of a HUD-Certified Housing Counselor who will guide you through the home buying process and help your find down payment and closing cost assistance.
To find a HUD-Certified Housing Counseling Agency go to HUD’s website page:
